FedEx Profit Forecast Shows Stalling Economy
NEW YORK -- FedEx Corp. says the global economy is stalling, and it's going to get worse next year.
The conditions are shrinking earnings at the world's second-largest package delivery company. Factories are making fewer items for FedEx to ship and customers are opting for cheaper delivery options to save money.
FedEx on Tuesday cut its outlook for global growth and industrial production while slashing the forecast for company earnings. And CEO Fred Smith suggested trade has slowed to levels seen during the last two significant economic downturns.
It's more evidence that the global economy has a way to go to a full recovery. Several countries in Europe are in recession and the U.S. is struggling with high unemployment and weaker manufacturing growth. And Smith said some experts have underestimated the severity of the slowdown in exports from China, where FedEx has invested heavily over the last several years, adding new planes to export goods and expanding its hubs and network.
FedEx's forecasts are closely watched for signals of future economic health. Its results provide insight into the global economy because of the number of products it ships and the number of countries in which it does business. Bigger rival UPS said in July that it expects the global economy to get worse before it gets better. UPS also cut its earnings forecast.
The slow pace of economic recovery is hurting FedEx because it relies on sharp spurts of demand to feed its air network. Demand for air freight is usually strong coming out of a period of slow economic growth, because retailers have whittled down their inventory and need to replenish quickly when demand picks up. The current recovery in the U.S. is the slowest since World War II.
FedEx lowered its expectations for U.S. economic growth to 2.2 percent in 2012 and 1.9 percent next year. Those are mostly in line with economists' views.
FedEx, based in Memphis, Tenn., cut its earnings forecast for the fiscal year ending in May to between $6.20 and $6.60 per share, from $6.90 to $7.40 previously.
For the current quarter that ends in November, FedEx forecasts earnings of $1.30 to $1.45 per share, compared with $1.57 per share last year. That's well under analysts' forecasts. FedEx will get a boost from major technology product launches, like the recently announced iPhone 5, but not enough to make up for the slowdown elsewhere.
Economic growth around the globe has slowed over the last several months. Output has declined in Japan, China and elsewhere in Asia. U.S. industrial production last month fell by the largest amount in more than three years, as factories produced fewer cars, pieces of furniture and other goods. Meanwhile rising gas prices and high unemployment kept consumers from spending freely.
Smith said a continued slowdown in the developed world combined with high fuel prices will keep trade volumes trailing growth in the world's economies, mimicking a trend seen in the last two recessions.
Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, agrees with that forecast, calling the current economic expansion "lethargic."
"Trade has been hurt significantly," Sohn said. "China was a fast growing export market for many countries including Germany and the United States. But now China is slowing. That hurts sales of everything from Mercedes Benz automobiles to Napa Valley wines."
Most of FedEx's pain is caused by a steep decline in Asian exports due to weakness in Europe. But consumers and business around the globe are also choosing to move goods by ground or ocean instead of by air to conserve cash. Smith said an "incredible increase" in fuel prices is a factor in that behavior.
Those changes are having the biggest impact on FedEx's Express unit. Operating income for Express, which is about double the size of any other unit, fell 28 percent in the first quarter. FedEx said major changes at the unit will be announced next month.
The company's earnings predictions don't include that restructuring. Because of this, Dahlman Rose analyst Helene Becker thinks FedEx's performance might exceed its own expectations.
FedEx shares dropped $2.72, or 3.1 percent, to $86.56, contributing to a mixed performance in U.S. stocks. The Dow Jones transportation average, which is made up of trucking companies, railroads and airlines, lost more than 1 percent Tuesday. That compares with virtually no change in the Dow industrials and a decline of only 0.2 percent for the Standard & Poor's 500.
Truckers and railroad companies aren't faring much better than FedEx. September is one of the most critical months of the year for freight companies because it marks the end of the back to school rush and the start of the holiday season. This year, the normal peak shipping season has been soft as retailers carry less inventory and freight prices fall because of waning demand.
In the three months that ended in August, FedEx Corp. earned $459 million, or $1.45 per share. That hit the top end of its recently lowered estimate. Revenue rose 3 percent to $10.79 billion. It earned $464 million, or $1.46 per share, on revenue of $10.52 billion in the same quarter a year ago.
The company's ground unit performed better in the first quarter as it benefited from customers trading down. Operating income in the company's ground segment rose 9 percent on an 8 percent increase in revenue.
AP Economics Writer Martin Crutsinger contributed to this report.
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Workers are not reaping the gains of their extra productivity.
Worker productivity grew 11 times more quickly than worker pay between 1979 and 2011: While <a href="http://stateofworkingamerica.org/fact-sheets/key-findings/" target="_blank">worker productivity rose 69 percent</a>, median hourly compensation rose just 6.5 percent, according to the Economic Policy Institute. [Chart credit: <a href="http://stateofworkingamerica.org/chart/swa-wages-figure-4u-change-total-economy/" target="_hplink">Economic Policy Institute</a>]
CEO pay has skyrocketed.
Maybe it's time to consider your CEO's massive pay package as a cut out of your own paycheck. <a href="http://stateofworkingamerica.org/wages/" target="_hplink">CEO pay is more than 200 times</a> that of a typical worker, up from 30 times that of a typical worker in the late 1970s, according to the Economic Policy Institute.
There aren't enough jobs.
At its current rate of job creation, the U.S. will not return to its pre-recession unemployment rate of around 5 percent before 2020, according to the Economic Policy Institute.
Job growth was slow even before the recession.
From the Economic Policy Institute: "The business cycle from 2000-2007 is the weakest full business cycle on record for job creation, due to the fact that demand was insufficient to drive overall GDP gains that were robust enough to generate strong job growth." It appears that the middle class squeeze has hurt job creation and economic growth.
We are poorer than we could be.
Households in the middle fifth of income distribution would have been making $18,897 more per year as of 2007 if their incomes had grown as quickly as overall average incomes between 1979 and 2007, according to the Economic Policy Institute. (The sizable income growth for top earners since 1979 skewed the overall average.)
The rich have captured most income growth.
The top one percent captured 60 percent of total income growth between 1979 and 2007, while the bottom 90 percent was left with just 9 percent of the total, according to the Economic Policy Institute. Moreover, the top one percent's incomes rose 241 percent, in contrast to 11 percent growth for the bottom fifth and 19 percent growth for the middle fifth. [Chart credit: <a href="http://stateofworkingamerica.org/chart/swa-income-figure-2a-real-median-family/" target="_hplink">Economic Policy Institute</a>]
Wages have grown more quickly for the rich.
Wages for the top one percent spiked 131 percent between 1979 and 2010, while wages for the bottom 90 percent of workers rose just 15 percent over that same period, according to the Economic Policy Institute. [Chart credit: <a href="http://stateofworkingamerica.org/chart/swa-wages-figure-4h-change-real-annual-wages/" target="_hplink">Economic Policy Institute</a>]
The poorest Americans are earning less than in 1979.
Americans in the bottom tenth of the wage distribution earned less last year than the lowest earners did in 1979, accounting for inflation, according to the Economic Policy Institute. Meanwhile, the real wages of the median worker rose only 6 percent between 1979 and 2011.
The American Dream is eroding.
"Families headed by early baby boomers (born between 1945-1954) are the last generation (on average) to achieve higher living standards than the one that preceded them," the Economic Policy Institute says. Among families with incomes below $28,000 in 1994, less than 1 percent made it to the top fifth of incomes 10 years later, according to the Economic Policy Institute.
This has been a lost decade.
On average, hourly pay has not grown at all since 2002 for workers with a college degree or with only a high school degree, according to the Economic Policy Institute. Wages have not grown for college graduates in nearly every occupation, and college graduates in the 70th income percentile or lower have had stagnant or falling wages since 2000. [Chart credit: <a href="http://stateofworkingamerica.org/chart/swa-wages-figure-4a-change-total-economy/" target="_hplink">Economic Policy Institute</a>]